LTD or Sole Trader? And accounting question?

Noideareally

Hi all!
I’m in a bit of a weird one. I recently left my full time job and started working freelance. A friend insisted I should work though a limited company for the tax relief and to avoid the high tax I would pay on sole trader income after being on payroll already this year.

Another friend recommended their accountant to me and he quoted £1.6k yearly in fees. If I’m honest, I’m not sure I will make enough in the first year to justify such a huge expenditure. I’m wondering if I should just be a sole trader? Or if a small business with only one employee really needs an accountant, is there any recommendations for doing it in house? Especially as I can’t imagine there’s a huge amount involved.

Thanks in advance for your thoughts!

00ec25

you cannot prepare limited company accounts without accounting knowledge, if you wish to teach yourself fine, it will take most of the year to get there, otherwise HMRC will crucify you if you submit false company accounts.
You can DIY sole trader tax returns using the relevant guidance for the return and base intelligence, not technical accounting knowledge.

Without seeing your numbers, no one can say if you have made the right choice for the initial year(s) of your contracting. Jumping straight into Ltd just because you can take your "pay" as dividends is not the deciding factor!

bear in mind, there is also the question of what do you mean by "freelance" - working through your own Ltd is not simply a question of tax efficiency in the context of some forms of contracting if caught by IR35. there will also be some customers who will insist on it, and refuse work to sole traders as it exposes the customer to risks around disguised employment.

rather than listen to friends, go and actually speak to the accountant and get them to do a comparison for you - it is what we do for new contractors, as some are then told not to bother with ltd.

trailingspouse

Most accountants will give you 30 minutes of their time for free - prepare your questions in advance, and make the most of it.

Becoming a limited company shouldn't be taken lightly - you'll be playing with the big boys.

Mistral001

Noideareally wrote: »

Hi all!
I’m in a bit of a weird one. I recently left my full time job and started working freelance. A friend insisted I should work though a limited company for the tax relief and to avoid the high tax I would pay on sole trader income after being on payroll already this year.

When I started my business, a know-it-all relative asked me what the biggest problem that I faced when starting up in business. I replied "friends and relatives giving me advice on how to run a small business".


I believe there is a slight saving in paying National Insurance, but apart from that you pay the same income tax whether you are sole trader or Ltd Company. I think the Government are planning to block the NI loophole if they have not done it already.

Note one big disadvantage of becoming a Ltd Company apart from the additional admin cost, is that your finances pretty much become public property and anybody can find out the profits you make and other details such as the addresses of directors etc.

00ec25

Mistral001 wrote: »

I believe there is a slight saving in paying National Insurance, but apart from that you pay the same income tax whether you are sole trader or Ltd Company. I think the Government are planning to block the NI loophole if they have not done it already

a perfect example of why OP should talk to an accountant, not rely on well intentioned but misleading snippets of half truths

Mistral001

00ec25 wrote: »

a perfect example of why OP should talk to an accountant, not rely on well intentioned but misleading snippets of half truths

Please enlighten us on the whole truth, rather than having a go at other members who have taken their time to give an honest answer to the OP's question based on their experience.

00ec25

Mistral001 wrote: »

I believe there is a slight saving in paying National Insurance,

sole trader: Class 2 Ni and Class 4 NI - depending on respective threshold

Ltd Co (employee earnings) - Class 1: 12% and 2% depending on respective threshold
Ltd Co (employer payment) - Class 1: 13.8% (above threshold)

what you have not mentioned is that a sole trader has no choice but to pay if above threshold. The owner of their own company can set their pay at such a level that no NI is payable at all, but they still get an NI "credit"

Mistral001 wrote: »

you pay the same income tax whether you are sole trader or Ltd Company.

it is true that the income tax rate is 20%, 40% or 45% irrespective of where your income arises

a sole trader pays income tax on all their profits at the above rate(s) less their personal allowance. There is no avoiding that.

as a Ltd Co owner, your company pays corporation tax at 19% on its profits, but you personally can decide how much you wish to take out of the company and thus expose to personal income tax at the relevant rate(s), but again what you have missed is the fact the owner does not take the bulk of their income as earnings, they take it as dividends, which are subject to 7.5%, 32.5% or 38.1% dividend tax rates (plus of course the first £2,000 is tax free, on top of your personal allowance)

there is a clear mathematical break point at which incorporation is much more tax efficient than sole trade for an owner